Tax Implications of a Cash out Refinance
Albuquerque, NM · Member since 2015 · 4 posts · 1 vote
Tax Implications of a Cash out Refinance
3 Replies
- 6yJeff CopelandBusiness MemberReal Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
You are asking about two different things:
1) Are the proceeds from a refinance taxable as income? NO. A refinance is not a taxable event. You are replacing equity with debt on your balance sheet, not earning additional income.
So, it is not tax deductible, per se. That is the wrong terminology. It simply isn't income, so there is no income tax on the proceeds of a refinance.
2) Is the interest on a refi tax deductible? It depends, as you said, on what the proceeds are used for. And it's probably best to talk your CPA about the details here.
Copeland Morgan LLC4.770 Reviews - Lender · San Diego, CA · Member since 2019 · 874 posts · 355 votes6y
Originally posted by @Samuel Kunzman:
Hello, I am trying to determine whether the interest on a cash out refinance for an investment property is tax deductible. I know on your home if you do a cash out refinance that you have to spend the new delta of loan proceeds on your home for the new interest, above the original loan amount of interest, to be tax deductible. Been asking around and not getting a straight answer so any help here would be much appreciated!
Natalie Kolodij (Moderator) - Accountant from Charlotte, NC
replied about 14 hours ago
Originally posted by @John Kwon :
So interest rates are tanking so I was about to refinance and take cashout from some properties.
But, speaking with my accountant, I found out that interest on the refi will not be tax deductible because I am not planning to improve the property.
So this mean that BRRRR method is no longer a good method at least from tax deduction point?
Thought?The interest is deductible if you use it for a business purpose.
If you refi and use the proceeds to either improve an existing property you own or buy a new one- then we use what's called "interest tracing" per the IRS and we deduct it against its qualifying use.
Natalie Kolodij
- 6yClayton SmithPro MemberRental Property Investor · Tuscaloosa · Member since 2019 · 88 posts · 38 votes
Originally posted by @Guifre Mora:
Originally posted by @Samuel Kunzman:
Hello, I am trying to determine whether the interest on a cash out refinance for an investment property is tax deductible. I know on your home if you do a cash out refinance that you have to spend the new delta of loan proceeds on your home for the new interest, above the original loan amount of interest, to be tax deductible. Been asking around and not getting a straight answer so any help here would be much appreciated!
Natalie Kolodij (Moderator) - Accountant from Charlotte, NC
replied about 14 hours ago
Originally posted by @John Kwon :
So interest rates are tanking so I was about to refinance and take cashout from some properties.
But, speaking with my accountant, I found out that interest on the refi will not be tax deductible because I am not planning to improve the property.
So this mean that BRRRR method is no longer a good method at least from tax deduction point?
Thought?The interest is deductible if you use it for a business purpose.
If you refi and use the proceeds to either improve an existing property you own or buy a new one- then we use what's called "interest tracing" per the IRS and we deduct it against its qualifying use.
Natalie Kolodij
I have a question about interest tracing.
My current loan is a SFH I have had for 7 years. I still owe $75k on the current loan for this property. Now lets say I cash out refi and take out a new loan for $100k and just deposit the $25k minus closing costs into a bank account. Can I write off all the interest expense? Will interest tracing allow me to write off the interest on the original $75k that I still currently owe but not the full $100k?
I am going to consult my CPA but wanted some knowledge before hand.
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